25 November 2016

This post is sort of a 'review article' post synthesizing all my previous posts about New Zealand Aluminium Smelters Limited and how their overly generous free allocation of emission units under the emissions trading scheme shields them from a carbon price. NB as of 17/02/17 this post is in it's final form.

I have written several blog posts about these free allocations. In the very beginning, back on 7 October 2011, I wrote 150% Pure Subsidy which was also posted at Hot Topic as 120% Pure Subsidy.

In that post I argued that New Zealand Aluminium Smelters Limited, the operator of the Tiwai Point aluminium smelter, was being 'over-allocated' emission units under the New Zealand Emissions Trading Scheme (the "ETS"). That the company was being given more free emission units than the emission units it was required to surrender for it's emissions. And therefore the company was not 'facing a carbon price' under the emissions trading scheme. It was being shielded from the carbon price. In other words, the allocation of free emissions units acted as an 'insurance policy' against ever facing a carbon price.

The over allocation is obvious, I thought, when we compare the emissions factor (as used in our greenhouse gas inventories) of producing a tonne of aluminium, with the allocation 'baseline', the number of emission units allocated per tonne of aluminium produced.

That allocation 'baseline', 2.556 units per tonne of production, exceeded the 'inventory' emissions factor in carbon dioxide equivalent (1.67 + 0.14 = 1.81) by a factor of 1.4. As indicated in this bar chart, which you could say represents a mental model of how the free allocation works.

“indirect emissions associated with the consumption of electricity, as well as direct emissions from ... industrial processes will be included in the concept of emissions from industrial producers ... The basis for allocation for electricity consumption will be one that compensates firms for the cost impact”.

For highly emissions-intensive trade-exposed emitters, the allocations would be based on actual production (i.e. an 'intensity' basis where allocation would increase if production increased) for the industry (Paragraph 14). The "90 percent" (of historic emissions) became a "90% level of assistance" (Paragraph 20) which then became an input to the formula for calculating the allocation number; 'Allocation (in units) = Level of Assistance × Quantity of Production × Allocative Baseline' (Paragraph 32).

An electricity allocation factor of 0.52 tCO2-e/MWh has been used to calculate proposed allocative baselines. This was the factor proposed in 2008 by the Stationary Energy and Industrial Process Technical Advisory Group (SEIP TAG) to offset the expected increase in electricity price as a result of the introduction of the NZ ETS. This factor was intended to reflect increases in electricity price to the end of 2012 and will need to be periodically updated.

So the counter argument is that New Zealand Aluminium Smelters Limited faces a carbon price through increased electricity costs rather than through the number of emission units surrendered for it's direct emissions.

We may say the allocation baseline has two parts; a direct emissions baseline and and an electricity/(energy) baseline. The free allocation of additional units for the ETS electricity costs lessens the impact of that carbon price (without removing it entirely). This bar chart, where the allocation baseline is less than the sum of the various emissions costs, is the mental model for this narrative for the free allocation.

However, the bar chart isn't the last word. I just made up the numbers to show the idea.

Free allocation to the smelter includes ETS electricity costs. What could possibly go wrong?

Back in the mid-2000s, when the ETS was being developed, what else did we know about the New Zealand Aluminium Smelters Limited electricity contract with Meridian Energy?

Brian Fallow also points out the pre-2013 contract exposed perhaps 10 per cent of the supply to the floating wholesale electricity price and that New Zealand Aluminium Smelters were very sensitive about the variability in wholesale prices when the hydro lakes had low storage levels.

The design of the generous free allocation regime moved the 'discounted' (but apparently still real) ETS 'carbon' price away from the direct emissions and to the ETS electricity pass through costs of an aggressive transnational company with the largest volume, cheapest and most secretive electricity contract in New Zealand. It would be harder to think of a policy more likely to result in regulatory capture (See Internet Archive) and rent-seeking.

Allocations including indirect energy costs may make emitters net sellers of units

There is one other important implication of upstream (ETS-related) energy costs being included in the 'allocation baseline'. The total allocation may well be greater than 100% of their direct emissions. But that doesn't matter if the emitter still faces some reduced electricity ETS cost pass-through.

The big 'emission intensive' and 'trade exposed' emitters will always be net sellers of emission units. It very hard to see how a net seller of emission units is, as Nick Smith liked to say, "facing a carbon price".

"The pertinent question, then, is how much electricity prices will increase as a result of carbon pricing. But electricity price increases are very hard to predict, due to the complexities of the New Zealand electricity market and the need to cater for rising electricity demand. Despite the difficulty, it is imperative the number of credits given to industry to offset electricity price increases should be accurately - and transparently - determined."

The critical questions are therefore "What are the extra costs to the smelter of thermally generated electricity caused specifically by the emissions trading scheme? How are these extra costs measured? Are the costs and method of measurement transparently disclosed?"

It's not classic cap and trade its a double-dip

Let's just be very clear that this idea of the allocation base including upstream ETS energy costs is conceptually a departure from the classic 'cap and trade' model of emissions trading. In strict cap and trade, with a real cap on emissions, and with 'grand-parented' free allocation of the 'capped' units to emitters, the energy sector would be allocated a share of the cap to reflect their direct emissions from energy generation. That allocation, being a part of the finite cap, could not go to both the energy companies with thermal fossil-fuel generation and to the 'downstream' industrial emitters.

In other words, the allocation of extra units to industries because of additional 'up-stream' carbon-intensive energy costs caused by the emissions trading scheme, is the allocation that would have gone to the energy companies in the classic model. That would not be possible in true 'all-sectors' emissions trading scheme with a real cap. It's only possible in our emissions trading scheme because it only applies to parts of the economy and as it is uncapped.

But lets get back to the issue of the 'ETS electricity pass-through costs'. At the time of 120% Pure Subsidy: Part 2 I argued that it was a nonsense for the free allocation of units to a smelter to include a compensation factor for upstream carbon-intensive electricity costs, when that smelter owed it's existence to a dedicated source of hydroelectric generation from Lake Manapōuri. Also the generator the smelter contracts it's electricity from is the 100% renewable Meridian Energy.

The counter argument is that that the contract (or contracts) with Meridian prices some proportion of the electricity supplied at the whatever the wholesale price is at a point in time. And as explained by Brian Fallow, the wholesale price may include an ETS component when coal generation is setting the marginal price.

In that post, I argued that the then Minister for Climate Change Issues Nick Smith was incorrect in saying that New Zealand Aluminium Smelters faced a carbon price and that European aluminium smelters did not. Even though the European smelters were not (at that time) participants in the European emissions trading system, the (upstream) electricity sector was and therefore there was a carbon price passed 'downstream' to the smelters from the more carbon-intensive European electricity generators.

I concluded that New Zealand Aluminium Smelter Limited had breathtaking audacity in threatening to close the Tiwai Point Smelter if they didn't get lower electricity costs, when they already enjoyed the lowest electricity cost of any sector in New Zealand. In 2011 New Zealand Aluminium Smelter Limited paid the very lowest average rate for electricity in New Zealand; 5.03 cents per kilowatt-hour! Residential users paid 22.6 cents per kilowatt-hour, or four times as much.

I noted that New Zealand Aluminium Smelter Limited was again threatening to close the smelter and in effect saying "Shame if something happens to" the smelter workforce, the Southland economy, the New Zealand electricity market, Meridian Energy and the conservation program for the critically endangered kakapo.

In this email, one official noted to another that Meridian Chief Executive Mark Binns had emailed them asking if the electricity costs mentioned in my Hot Topic blog post were correct and that yes the numbers were correct!

Another couple of years went by. As they tend to. Then, on 9 April 2016 of this year, I wrote Opening up the data on emissions units in the NZ emissions trading scheme. In that post I noted with some surprise that the updated data on free emissions unit allocations showed that New Zealand Aluminium Smelter's 2013 allocation had increased by a factor of five from the 2012 allocation. And of course I made a bar chart.

So what happened in 2013? The free allocation increased from 301,244 units in 2012 to 1,524,172 units.

What happened was that the 2013 allocative baseline for aluminium production changed from 2.062 units per tonne to 10.441 units per tonne. As you can see from this bar chart.

They would instead have a 'bespoke' arrangement for the electricity component of the allocation baseline.

This apparently involves an annual "reading" of the highly confidential ultra-cheap electricity supply contract with Meridian. There are a number of potentially ambiguous statements about how this is done.

Paragraph 38 states;

"Specific electricity supply arrangements mean it is appropriate to prescribe specific allocative baselines for aluminium smelting. The Act contains the ability to adjust allocative baselines where particular electricity supply arrangements affect the electricity price increase a particular firm faces. The rationale for this power is to prevent large over-allocations where electricity related contracts prevent a full pass-through of electricity costs."

Paragraphs 40 is in first-person and active tense (think of Nick Smith speaking confidently) and it states (with my underlining)

"I have since used my powers under section 161D of the Act to request electricity contracts and related information from NZAS. [Deleted] In particular the analysis suggests:

An average pass-through of electricity costs to NZAS during the transition phase (until 2013) of [Deleted] compared with the pass through of 0.52 tCO2-e/MWh that would otherwise be assumed.

Using the default pass-through of 0.52 tCO2-e/MWh would result in an average over-allocation to NZAS of [Deleted] during the transition phase.

The actual pass-through to NZAS during the 2010 to 2012 period is likely to be significantly higher or lower than the average value above".

So it's not just a matter of reading the contract. There is also "related information" from New Zealand Aluminium Smelters Limited. There is also an "analysis". This "analysis" suggests that actual annual pass-through electricity costs vary from year to year and may be more or less than than the electricity allocation baseline. However, in spite of this variability, the average pass-through electricity costs for the years 2010 to 2012 is known (but has been deleted to keep it confidential) and is less than 0.52 tCO2-e/MWh.

Paragraph 9 of the Executive Summary states a fairly firm conclusion;

"Information obtained from New Zealand Aluminium Smelters Limited (NZAS) enables electricity pass-through costs that NZAS faces for 2010 to be determined with reasonable certainty at this point."

Paragraph 41 states; "to reflect the actual electricity costs to NZAS, the allocative baseline for NZAS would need to be amended at the beginning of 2011, 2012 and 2013 to ensure that final allocations more accurately reflect the pass-through of electricity costs to NZAS".

So, in conclusion, the Ministry for the Environment has set up a regulatory process where New Zealand Aluminium Smelters Limited is enabled and encouraged to annually provide the Ministry with "related information" and "analysis" of the electricity contract - in order to set the allocation baseline and therefore the number of free units they will be allocated. And this information analysis is not disclosed. It's hard not to conclude that this bespoke process allows New Zealand Aluminium Smelters to annually nominate it's preferred free allocation of emission units.

28 September 2016

Let's look at the latest data on the very generous free give-aways of emissions units to emitters made by the New Zealand Ministry for the EnvironmentN.B. Update on 10 December 2016. The allocation decisions have moved to the web page of the Environmental Protection Authority.

The url of the old Ministry for the Environment web page is http://www.mfe.govt.nz/climate-change/reducing-greenhouse-gas-emissions/new-zealand-emissions-trading-scheme/participatin-4

The url of the EPA web page is http://www.epa.govt.nz/e-m-t/taking-part/Industrial-allocations/allocations-decisions/Pages/decisions-2010.aspx. And unfortunately, the Google sheet 'scrape the table' script does not seem to work with the EPA page.

However, the data does not have a "tidy" structure, where each variable is a column and each observation is a row (Wickham, Hadley . "Tidy Data"Journal of Statistical Software [Online], Volume 59, Issue 10 (12 September 2014)).

The first column includes both industry names and types of industries classified by the type of emissions the industry produces. And lots of asterisks. A tidy format would have these attributes (or variables) as separate columns so that each company/emitter would have a row each.

I used a programme called Open Refine (which is also at Github) to data-wrangle the data into tidy format and to save it as a comma-separated values file which is this Google sheet NZETS-2015-final-allocations-for-eligible-activities. Its a bit fiddly using Open Refine, and I have not documented the steps. I won't describe how I did it. Yes, I know, from the point of view of reproducing the tidied data I should have done the tidying with a script or code. Next time I will.

As usual, the big emitters get the most emission units! Of 4.417 million units allocated to industries, 90% went to 11 large companies. New Zealand Steel Development Limited, of arbitrage profits fame, gets 1,067,501 free units. New Zealand Aluminium Smelters Limited gets 772,706 free units.

New Zealand parents often tell their children not to eat too many sweets. Our primary schools spend a lot of time talking about suitable diets. We do this because we have the long term interests of our children at heart.

I find the contrast between that and how we currently approach climate change disheartening and distressing and especially when I consider all the families I know who are now taking flying holidays with their children.

This is a really uncomfortable topic. But we have to talk about it, and do so urgently.

We should, by now, all know the math. There isn't any personal activity we or our children can engage in that is even remotely close to air travel in terms of the sheer volume of greenhouse gas emissions it produces.

Google tells me that a Boeing 747 burns roughly 12 litres of aviation gas per kilometer. That is pretty good economy for carrying 500 people a short distance. But not if you are flying 18,819 km, the distance from Wellington to London and back. In that case, every person on the flight is responsible for consuming 450 litres of fuel. To put that in perspective, imagine if, instead of taking that trip, you revved up an average family car in your driveway to 100km/hr and at 6 litres per 100 kilometers you would need to leave it running for 75 hours or 3 days. Then repeat that for each family member that took the trip.

If you did that in your neighbourhood, you would be called a crass and thoughtless person, and people might wonder what sort of children you were raising.

We also know that the emissions from our plane trips this year and this decade will continue to heat the planet for hundreds of years.

It isn't necessary to bang on about how bad things will get if we keep doing this. We already have an inkling from worldwide weather trends in the last 12 months. The thing to bear in mind is that the emissions we are contributing so hugely to through air travel are a severe threat to the future lives of our children, a much greater threat than a bad diet.

In the face of all of this, we have to accept, I think, that at the moment we are responding essentially with the instincts of small children:

We can see that we should stop this behaviour but wont because it would inconvenience us, be 'too hard' and 'everyone else is doing it'.

We don't like to talk about it. We mumble an excuse and move away if it comes up.

If we have to confront it, conversations quickly get tense as we get defensive about our reasons for keeping on with this clearly inappropriate behaviour.

We avoid mentioning the issue with our own children because we know they would instantly spot our hypocrisy.

In addition, and maybe this is the worst of it, by taking them on a flying holiday with us, we implicate them in our bad behaviour.

You may wonder how or why the ICAO picked on 2020 as a benchmark in the first place. I don't know. No one does. It has no bearing on reality, no bearing on trying to avoid dangerous climate change by keeping within the global average temperature rise within 1.5 of 2 degrees, and isn't intended to.

It's the best that can be politically extracted from 190 odd nation states who know that their home populations are acting like children and wont forgive them if they try to have a serious conversation about reducing airline emissions.

Here are some of the problems with the ICAO goal:

the ICAO has been promising action for ages. It got the mandate to work on reducing aviation greenhouse gases in the 1997 Kyoto Protocol.

The ICAO plan does not cover domestic aviation - that's about 30% of aviation emissions.

By 2020, annual emissions will be around 1000 megatonnes. And there is no plan to reduce them at all, just to hold the annual level to about 1000 megatonnes.

Even after making heroic assumptions about how much new aeroplane design developments can cut back on some emissions, the ICAO has calculated that it can only meet its target with offsets.

That's right, the emissions from our holiday flights in 2020 will be fine because someone else somewhere else (the details don't need to concern us) is going to promise to grow some trees and keep them growing until around 2400 or so. I don't think hubris really captures it. Its the sort of fantasy that only children could indulge in.

And lastly, and here is the real kicker, the ICAO isn't going to do pretty much any of this. It has just announced that it is about to reset the start date of the proposal so it wont be compulsory for any nations until 2027, and will allow for whole sectors of aviation to aggregate their emissions. So there will be lots of delay and massaging of numbers. We all know what happened with the fraudulent carbon credits under New Zealand's emissions trading scheme, and, with the fantasy thinking of offsets thrown in, I expect you can see where all of this is heading.

This also means, obviously, that when your local airline tells you it supports the ICAO approach, has purchased some electric cars or is putting solar panels on the roof of the airport, or planting some trees for you to fly over in their planes, but has not yet switched its entire air fleet to bio-fuels or done something as blindingly obvious as stopping its air-points programme, you can just politely ignore them.

There is a technical term for this refusal to face reality. Its called cognitive dissonance. That is, juxtaposing two contradictory ideas and finding ways to manage the mental chasm between them. In this case its not just the contradiction between our personal carbon emissions from air travel and stated concern about climate change, its the fact that as parents we care for our kids while managing the secret knowledge that we risk literally shortening their lives and most certainly the lives of their own children.

I am selfish. My worry is that future children will look at our thousands of travel photos alongside the news headlines about record-setting heat, storms, floods etc, and wont just label us childish. Sociopaths is the terms we use for people with a sense of entitlement so strong that they would prefer mass death over personal discomfort and unease. But maybe they will just call us cowards. Then again, they might get inventive and call us child abusers.

I think we need to be uncomfortable for a little bit. We are adults. Adults can examine the situation rationally, and tell our kids that the hyper-mobile life of flying holidays we have been creating for ourselves and them is going to put us all in danger and has to go on hold. We all have a habitable planet to save right
now.

So get out your air points statement. Explain to the kids you are donating all of them to forest planting. Tell them that holidays from now on will be a bit closer to home, and that overseas flights are special, rare things, that we will reserve for them when they are older, when they are adults and we have made sure the world is safe again.

Anderson's message is that although the Paris Agreement was a diplomatic triumph, it relies on speculative utopian technological fixes (bio-energy carbon capture and storage) in the future in order to reconcile the now extremely limited carbon budgets consistent with the desired 2C (and 1.5C) temperature limits with business-as-usual economics and politics. In other words, the Paris Agreement locks out the 2C target.

Why do I mention that? Because I want to run a 'Kevin Anderson' ruler over the New Zealand Government's recently announced ratification of the Paris Agreement. To conduct a bare assessment of New Zealand's emissions taking account that it is the cumulative emissions that determine warming. I want to ask the question 'does the New Zealand ratification also lock out any policies for emissions reductions consistent with a fair share of a 2 degrees Celsius carbon budget?'

To set the context, I'll set out some of the mechanics of what ratification of the Paris Agreement will require in New Zealand. Then in true Kevin Anderson style there will be a look at projected emissions and some graphs.

"..presenting the agreement and a national interest analysis to Parliament for examination by a select committee, after which the select committee tables a report in the House. After this, legislation may be passed and then New Zealand may ratify the Agreement".

Therefore, some stepping stones are apparent. There will be a Parliamentary Select Committee considering the National Interest Analysis and submissions. That Parliamentary process has its shadow process, the Ministry for the Environment driven, and therefore more Government-controlled, review of the New Zealand Emissions Trading Scheme. Some amending legislation will probably be presented as the outcome of both processes.

A crucial point will of course be the detail of this amending legislation.

Ralph Sims, who was writing back in February, was hopeful that the New Zealand NDC would be strengthened to be more ambitious, given that the sum of the 2015 INDCs "collectively would lead to an untenable 2.7 – 3 degrees Celsius future, rather than restrict global warming below the internationally agreed 2 degrees Celsius above pre-industrial levels" He seemed to have some hope that the then yet-to-be published Royal Society climate mitigation report would contribute to that.

So does that mean the Government will actually do something to reduce domestic emissions? Perhaps toughen up the emissions trading scheme, so that it uses only New Zealand units and has a fixed cap (as in 'cap and trade'), and auctioning units instead of free generous allocation of units to industry? No, of course not!

The National Interest Analysis continues on paragraph 104 on page 30:

"We have assumed that New Zealand will be able to purchase sufficient international emissions reductions in the 2020s".

So instead of domestic emissions reductions, we are betting the farm on the magic of the market, more speculative emissions trading, open access to and availability of international emission units from international carbon markets. However, this is no sure thing. Table 5 on page 15 states (my emphasis):

"The (Paris) Agreement provides for a centralised market mechanism and also allows other approaches to be developed by Parties. When and how the centralised market mechanism will be operationalised is unclear, and it may not provide a timely and sufficient supply of emission reductions to be economically practical for New Zealand’s use.".

So no pressure, New Zealand! The analysis then lists the many steps/obstacles on and in the way of New Zealand having access to functioning international carbon markets.

"This means that New Zealand will likely need to build future international markets from the bottom up in cooperation with other willing participants. New Zealand must: find willing trading partners, develop standards (including working with others) to ensure international carbon markets can function effectively (eg, on environmental integrity and unit registries), ensure that its trading activities are consistent with any future accounting requirements".

Paragraph 64 on page 19 of the Paris Agreement National Interest Analysis then states:

"New Zealand’s first nationally determined contribution (i.e. the 2030 target) was developed on the basis that New Zealand will achieve the 2030 target through a combination of domestic emission reductions, forestry growth and participation in international carbon markets."

At the time of their release in late December 2015, Radio New Zealand reported the complete inconsistency with the freshly-signed Paris Agreement; Emissions set to far outstrip Paris target. And they quoted an expert.

"Suzi Kerr, a senior fellow at economic research institute Motu, said the projections were completely incompatible with the target New Zealand took to the Paris climate change talks"

Here is a chart of these incompatible projected emissions from 2013 to 2030 by sector. The emissions for all sectors are all expected to increase. For the land-use, land-use change and forests (LULUCF) sector, the net carbon absorbed (or sequestered) is displayed as negative emissions and is projected to decline.

Here is another chart of the projected gross emissions (without LULUCF) and the LULUCF carbon sequestration (shown as negative emissions). The LULUCF 'credits' are subtracted from the gross emissions to get net emissions (the red line and dots) which is the real measure of what gets into the atmosphere. Note that the forestry sequestration is declining towards zero through the 2020s, but is still a net 'sink' of emissions.

However, wasn't there meant to be a 'wall of wood' in the 2020s? Of wholescale harvesting or land-use change of the 1990s pine forests that would tip the net carbon sequestration from the forests into being a net source of deforestation emissions in the 2020s.

"They intend to switch to an 'averaging' approach, which will completely remove the planting and harvest cycle once a plantation forest reaches maturity. This change actually seems sensible; the problem is that we are changing the rules halfway through the game, in a way that directly favours us. If we had used the proposed rules from the beginning, New Zealand would receive far fewer forestry credits up to 2020"

We can look at this issue by comparing the current (December 2015) projections for the forests/LULUCF sector with the previous projections that were in the 2013 Sixth National Communication.

It seems very obvious that the Ministry for the Environment have used a very different definition of sequestered forest carbon in 2015 from the definition used in 2013. By my calculation they have found an extra 248 million tonnes of carbon in the decade from 2020 to 2030. That change in accounting treatment has changed the 'sign' of the signal. A decade of net deforestation has changed into a decade of net storage. That is inspite of the fact that the wall of wood of harvesting is still expected in the 2020s.

Time for a conclusion. Is the New Zealand ratification of the Paris Agreement going to help or hinder the agreement's ambitious goals?

The ratification reveals that New Zealand will be doing what it's always done under the UNFCCC. New Zealand's greenhouse gas emissions are expected to rise and our policy response is more creative accounting and forest fudging. Our speculative utopian techno-fix is emissions trading. The New Zealand Government simply has no policies for reducing domestic emissions, let alone in a way consistent with a fair share of a 2 degrees Celsius carbon budget.

The paper explicitly sets out to explore a New Zealand carbon dioxide budget consistent with limiting eventual global warming to two degrees Celsius, using the contraction and convergence method.

Presumably because of that aim, the paper appears to have been completely disavowed by the Ministry for the Environment. The cover letter replying to my request at FYI states that the report is neither formal advice to the Government nor is it Ministry policy. The report has a header stating that it is 'sensitive' and 'Not Government or Ministry policy'. There is an italicised inserted 'Note' saying that Treasury does not agree that contraction and convergence is an appropriate measure of a 'fair share'.

The guts of the report are three carbon budgets (a 10th percentile, a median and a 90th percentile) based on applying contraction and convergence to one of the IPCC two degrees-consistent carbon budgets. Oddly, the working calculations and the actual budget amounts are omitted. I guess I can just make another request for them. The budgets are only presented in this graph.

28 August 2016

Geoff Simmons tells us a good story about dodgy uncle Trev, fake bank notes and real moro bars while he fact-checks Paula Bennett on the integrity of the surplus emission units. It's a real triple-dip!

Geoff explains the issue very well and has the numbers right. More than that, I think Geoff should get the Joe Romm language intelligence award for using a great metaphor for New Zealand's use of the 'hot air' Ukrainian and Russian emission reduction units.

Dodgy uncle Trev's fake twenty dollar note.

Your dodgy uncle Trev gives you a twenty dollar note. It looks like a ordinary twenty dollar note, but knowing uncle Trev, you have your doubts. Anyway, you use the dodgy note to buy a moro bar at a dairy and get back seventeen dollars change in valid notes. The dairy owner now has a fake twenty dollar note in the till. You have eaten the real moro bar. You still have seventeen real dollars. You could buy more moro bars.

The purchase of the moro bar stands in for the emitters surrendering the 'el-cheapo' emission reduction units to the Government under the emissions trading scheme. And also for the Government then using the 'el-cheapo' emission reduction units that it holds to comply the Kyoto Protocol 2008 to 2012 target.

The seventeen real dollars (and the moro bar) are the legally valid 'surplus' assigned amount units that the Government is now 'using' to meet both the 2020 and (some of) the 2030 emissions reduction targets. The Government has, in effect, used the post Kyoto unit surrender mechanism to 'launder' the dubious emission reduction units from the emissions trading scheme into valid surplus assigned amount units held in Government accounts.

Arguably, Bennett's intentions are ethically worse than the fake-note-moro-bar metaphor. Bennett is going for a "triple dip" of using surplus/dodgy units to 'comply' with three different emissions targets in spite of the upward trend in New Zealand's GHG emissions.

You can verify for yourself that the Government intends to do some creative accounting with the surplus units so that they allow greenhouse gas emissions to increase out to 2020 while the Government can claim that New Zealand is 'meeting' it's "minus 5%" emission reduction target. Just go to Latest update on New Zealand's 2020 net position on the Ministry for the Environment's website.

That webpage states explicitly that New Zealand will have 85.7 million emission units surplus to use out to 2030 after using some to meet the 2020 target. Here is a screenshot.

Further down the page is this barchart that shows that New Zealand's gross emissions from 2013 to 2020 are expected to be 655.9 million tonnes and that the baseline is 509.8 million tonnes. I have somewhat crudely marked the increase in emissions on the left hand bar.

I fully agree with Geoff Simmon's conclusion. It's simply unethical to make a monetary gain from fake currency. Just as you should wipe the moro bar crumbs off your shirt and give the dairy owner back the seventeen dollars (or a real twenty) in place of the fake note, Paula Bennett and the Government should cancel the surplus units instead of explicitly using them to meet targets while emission volumes increase. And we should never ever let ourselves be in the position of having an uncapped internationally linked emissions trading scheme that permits creative accounting as our main climate change policy.

15 August 2016

Geoff Simmons and the Morgan Foundation have done it again! They have just released a sequel to 'Climate Cheats', the fantastically-named 'Who’s the Real Cheat Here? Climate Cheats II: The Dozen Dirty Businesses'. Simon Johnson breathlessly reviews Climate Cheats II and concludes that while it's about time we had some transparency over Government and corporate shenanigans with emissions trading, we mustn't forget that these are symptoms of the root problem - the uncapped design of the New Zealand emissions trading scheme.

Simmons and co then note that Minister Bennett has refused requests to cancel the surplus dodgy units the Government holds, giving the excuse she is 'seeking advice' (That would seem to be a perpetually applicable excuse!). So they ask 'who owned and used dodgy emission reduction units?' The dirty dozen corporates, of course.

The report then discusses three types of liability (physical, liability and transition) that may fall on companies who used the emission reduction units. To paraphrase, Simmons is thinking 'did they really think this would never come back and bite them?' And he is making the point that if Government is failing to act ethically, then why don't we shine a spotlight on our corporate citizens and ask them to shoulder some of the responsibility for the dodgy unit fiasco?

Simmons assigns highest culpability to New Zealand Steel and Fonterra. Because they are emitters who received generous free allocations of NZ units but who also owned dodgy emission reduction units. Referencing a blogger (meaning me!), the report notes New Zealand Steel booked $4.4 million Australian dollars of profit from emissions trading that is probably from arbitrage trading of their free NZ units while also owning dodgy units.

Five forestry companies are on the dozen list. Some sympathy is due to some of them as the unit price crash devalued their allocations of units. But none is due to any foresters who carried out 'forest re-registration arbitrage' in the ETS. This was exiting and re-entering the same forest in and out of the ETS several times. For each ETS 'exit', the forester would 'square-up' the refund of carbon liabilities with emission reduction units costing several cents each. For each 're-entry' to the ETS, the forester would be given an allocation of free NZ emissions units worth a few dollars each. The result being instant no-effort windfall profits. The Government took far too long to clamp down on this practice.

Finally, energy companies get their turn in the spotlight. BP, Chevron, Z Energy, Contact Energy and Genesis Energy all owned and used some dodgy international units. Did these companies price their products to NZ customers on the basis of the higher NZ unit prices or the lower dodgy unit price? The Morgan Foundation approached the energy companies for comment which is in an appendix. All give worthy statements saying they followed the rules and of course they put customers first. However, Mobil shows up the fine words of the others. Mobil never owned any dodgy international units and managed to supply fuel just as competitively as the others.

Climate Cheats II concludes by suggesting that the companies who owned dodgy international units and lowered their costs (as well as those who made windfall profits) have two options to put things right.

They could voluntarily cancel NZ units to match the dodgy units used

They could alternatively pressure Paula Bennett to cancel the surplus units the Government holds.

With NZ emission unit prices now hovering between $17 and $18 per tonne, the latter option will hurt much less than the former.

In summary, it's hard not to like a Morgan Foundation report that references me! But leaving that bias/good taste aside, Climate Cheats II is a concise readable summary of the abject state of New Zealand's emissions targets and trading policies and practices. As Kevin Anderson would say, we need to see clearly where our rose-tinted spectacles have brought us. Climate Cheats II mostly does that.

However, if anything, the report, by focusing on the top dozen owners of the dodgy international units, underplays the pervasiveness of the ownership and use of those international units. Most entities with emissions trading accounts owned some dodgy units. In 2013, more than 400 entities (out of 496 account holders) owned some share of the almost 35 million emission reduction units in private hands. You can check this with this Google sheet of Kyoto Units obtained from the Emission Unit Register at the EPA.

Finally, I have one concern which is perhaps more about how 'Climate Cheats II' will be received rather than what message it has. It seemed to me that the media response to initial splash of 'Climate Cheats I' (they loved the emotive framing - 'fraud!' - 'cheating!') really missed the fundamental point that I think both reports support, and that other assessments of the ETS support, that an emissions trading scheme that has no cap on emissions, that earns no revenue and that isn't economy-wide, is an excuse and rationalisation for doing nothing and not an effective mitigation policy at all.

The analysis in our report suggests that the current Canadian target of a 30% reduction below 2005 levels by 2030 could be consistent with maintaining a likely chance (66%) of limiting warming to less than 2°C globally, but only if Canada is given a generous allocation of the world’s “remaining” future carbon budget (based on the present fraction of the world’s emissions). A target consistent with a likely (66%) chance of avoiding 1.5°C of warming globally is extremely limited regardless of the method of allocation. Even under a generous allocation to Canada, national net CO2 emissions would need to decline 90-99% below 2005 levels by 2030.

Simon Donner also notes that "The 1.5°C limit is at best unrealistic, at worst politically impossible.”

Simon Donner is also highly aware that 'sharing-on-current-emissions' unfairly favours developed highly carbon-intensive OECD countries like Canada (or New Zealand) over the developing countries with much lower greenhouse gas emissions per capita.

Allocating the remaining carbon budget based on present-day emissions places an unfair burden on developing and rapidly industrializing countries that historically have had low per-capita emissions. Despite being far less responsible for climate change to date, and currently having low per-capita emissions, countries like India would essentially be asked to bear an equal part of future mitigation efforts.

Good work Canada! But where the bloody hell is New Zealand's 2C consistent carbon budget?

In his presentation, Kevin Anderson revisited the scale of the climate challenge, arguing that whilst the science of climate change has progressed, there has been no corresponding acknowledgement of the rate at which our emissions from energy need to be reduced. He suggested that the Paris Agreement exemplifies this duality. Similarly, he argued that the focus on green growth continues to eclipse analysis which demonstrates the need for radical social as well as technical change. Prof. Anderson developed a quantitative framing of mitigation, based on IPCC carbon budgets, before finishing with more qualitative examples of what a genuine low-carbon future may contain.

Anderson's key message is that due to the constant privileging of economic analysis over physics, the finite carbon budget consistent with no more than two degrees Celsius of average global warming will only be achievable with an "outside" probability of 33% if the developed countries suppress energy demand and reduce carbon dioxide emissions by 10% each year and fully de-carbonise their energy sectors by 2035.

The talk is also available on Youtube in two parts. Part One has had 1,975 views. Part Two has had 664 views.

I usually browse with Firefox and I have installed an add-on called Down load helper. That enables me to download talks as mp4 files I can listen to later.

There are two differences from the talk given to the University of Sheffield. The sound is a bit boomy and not as clear as the University of Sheffield recording. And when Kevin Anderson says "people with grey hair or no hair have failed the generation born since the IPCC was established", the grey-hairs seems to be the audience from the two in the foreground.

To crudely sum it up, Bennett's reply is "No we won't cancel any surplus units. Those bad bad Ukrainian units! It was bad. But we stopped being bad, we won't be bad again, at any rate no more bad than any one else!"

Here is the text of Bennett's letter. For context, I have put the text of my open letter to Bennett at the bottom of this post.

Thank you for your letter of 23 May 2016 about surplus Kyoto Protocol assigned amount units.

As you say, the Government has a surplus of 123.7 million Kyoto Protocol emission units which were left over after we retired units to meet our target for the first Kyoto commitment period.

I accept that there were up to 97 million Emission Reduction Units (ERUs) bought and surrendered in the New Zealand Emissions Trading Scheme (NZ ETS) before the Government stopped accepting them. That was within the rules, but we now know many of the ERUs are likely to have had poor environmental integrity. We are not accepting international units now, and we are working hard to make sure any international units traded in the NZ ETS in the future are of high environmental integrity. We are reviewing the NZ ETS to make sure it will be fit for purpose in the future.

As we have said in the past, we will meet our target of -5 per cent by 2020 using a combination of domestic abatement, forestry removals, and some international purchasing. There is information about the target on the Ministry for the Environment website at www.mfe.govt.nz.

We have not made a decision about what to do with any Kyoto units that are left over after we have met the 2020 target.

Nearly all other Kyoto developed countries also have surpluses. Some of them have said they will cancel units, but haven't actually cancelled them yet. There is no urgency to do anything with these units, and the fact that we are not cancelling them at this stage doesn't put us out of step with other countries.

Let's look a little harder at three statements in Bennett's letter.

"We are not accepting international units now" Bennett is implying that the New Zealand Government made an express decision to stop the importing of some low-integrity international emission units. In fact, New Zealand ended up with no access to international carbon markets when Tim Groser told the UNFCCC that New Zealand was not going to have a formal emissions reduction commitment under the Kyoto Protocol for 2013 to 2020. Ms Bennett and the Ministry for the Environment should stop implying that some positive decision was made. Its just not true.

"not cancelling them... doesn't put us out of step with other countries" Heaven forbid that New Zealand should be out of step with the many other countries who are also doing nothing about climate change!

I see that in the Snapshot summary on Figure 5, page 5, that New Zealand is still intending to use 123.7 million emission units (Assigned Amount Units or 'AAUs') that were 'surplus' from the Kyoto Protocol first Commitment Period to meet the 2020 emissions reduction target and still have a surplus of 92.6 million units.

You are aware that the Morgan Foundation's report 'Climate Cheats' and the Stockholm Environment Institute report (Kollmuss, Schneider and Zhezherin 2015) set out a persuasive case that the 97 million Emission Reduction Units ('ERUs') that were imported to New Zealand were “questionable or of low environmental integrity”. Those ERUs were surrendered by NZETS participants into Crown holding accounts.

According to the Kyoto Protocol 'True-Up' Report, in December 2015, the Ministry for the Environment cancelled (transferred Crown-owned units to cancellation accounts) 373 million emission units to comply with the Kyoto Protocol. The numbers and types of units cancelled were: the 97 million imported ERUs, 16 million imported Certified Emission Reduction units ('CERs'), 81 million removal units ('RMUs'), and 179 million AAUs . The 'surplus' units remaining in Crown holding accounts were 124 million AAUs.

In a nutshell, the only reason New Zealand (the Crown) has so many 'surplus' AAUs is because of the inflow and use of the dubious ERUs in the NZETS. Each dubious imported ERU has allowed one additional AAU to be carried forward in a Crown holding account as a 'surplus' unit. Because the ERUs have no credibility, the AAUs no longer represent carbon safely stored out of the atmosphere. No emissions were reduced. Therefore to use these surplus AAUs to comply with the national 2020 emission reduction target is simply an exercise in creative carbon accounting. It is simply unethical.

I put it to you that as Minister for Climate Change Issues, you are morally obliged to cancel these surplus units owned by the Crown. Will you cancel the units? It may hopefully to some small extent restore New Zealand’s very tarnished reputation with respect to mitigating climate change policy.